27 Ate Today?Thank a Farmer. Better Farming | November 2023 Inflation & interest rates the last two decades and rising asset values compared to the ’80s. But that’s not to say farmers are out of the woods. “A drop in commodity prices now could be the major driver to change the situation and narrow margins considerably,” Weersink warns. Higher debt servicing costs e reverberations of today’s relatively high interest rates have been felt throughout the farming sector. Weersink says the e ects will ultimately depend on how much debt an individual farmer has and how it’s structured. “Rising rates will increase expenses for everyone, but those who are highly leveraged, and those with high operating lines and/or long-term debt that will be re nanced soon will be most impacted,” Weersink says. Gervais adds that rising rates translate to higher debt servicing costs, with the impact being felt more for those with capital expenditure requirements, which are o en nanced via loans. “ ose farms that are the most leveraged and capital-intensive – borrowing to add or replace equipment – would tend to be most exposed to rising rates,” Gervais explains. “In contrast, those that have healthy cash ows and have less of a need to borrow are least exposed to rising rates.” However, rising rates add risks not only to farmers who borrow, but also to those who don’t. “ at’s because higher rates tend to act as a drag for the whole Canadian economy, reducing economic growth and impeding demand for commodities as a result,” Gervais says. One sector that could be most a ected by high interest rates is dairy, according to Olson. Dairy farmers are typically able to borrow more than cyclical production sectors because of the guaranteed income ow that comes from supply management. With higher debt levels than other farm sectors, dairy farmers may feel greater pressure to make decision-making changes, he says. Less borrowing Of course, they’re not the only ones re-evaluating their decisions, and Olson says farmers in general are thinking twice about borrowing money while looking harder at their purchasing options. Gervais also sees so er demand for credit emerge as the sector adjusts. But strength in farm cash receipts over the last several years has allowed farmers to increase the use of cash in investment decisions, including the purchase of farm inputs and assets, he says. Farm cash receipts remained strong the rst two quarters of 2023 – up $4.3 billion versus the same time a year ago to $48.3 billion, according to Statistics Canada. However, FCC reports yearend 2023 and rst-half 2024 crop receipts will come under pressure from an estimated 13 per cent drought-related cut to grain, oilseed and pulse output. Additionally, farm net income recorded a major boost in 2022 due to the increased value of inventories from 2021’s drought thanks to a production rebound in ’22. “ ese stocks can and have been converted to cash, although this was done in 2023 at lower prices on average than the prices recorded in 2022,” Gervais notes. He adds that sectors hit by adverse growing conditions and/or low commodity prices this year will nd pressures on pro t margins to be more signi cant and ampli ed by higher interest rates. Farmland e price of farmland may also be impacted by higher interest rates, but there are two schools of thought there. Higher interest rates should theoretically lower farmland prices because interest rates raise the costs of borrowing and production, making land less a ordable. However, in ationary pressure can also encourage people to move their money into hard assets that store their value and keep up with in ation, like land. Olson works not only in Manitoba, but also southwestern Ontario and southern Saskatchewan, and he hasn’t observed downward pressure on farmland prices. In fact, quite the opposite. “We see clients that are still in a fairly good nancial position aggressively buying land, so we see land prices still moving up,” says Olson. “If you’re a high equity, low debt farm that’s had a few good years, you’re still going to be aggressively looking at purchasSome young farmers are experiencing rising interest rates for the rst time. Tracy Miller photo
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